Warning: Immigration Can Seriously Damage Your Wealth

Another argument to be considered is that of pro-immigration enthusiasts, who
point to the USA and state that it is an economy based on immigration and has
the highest standard of living in the world – therefore immigration must be
beneficial to native Americans. In reality, US economic success is based on its
productivity and relatively free economy. The difference between it and the rest
of the world was greatest between 1924 and 1965 – during a period of low
immigration. If immigration promotes a higher standard of living, then
Argentina, which received proportionately even more immigrants than the USA in
the late nineteenth century, would be richer than the countries from which the
immigrants came, such as Italy, Germany and Spain. It is not. A journalist such
as Luke Johnson can castigate Japan for its low immigration rate and state:
‘This lack of fresh blood may be one reason why, until recently, their economy
had significantly stagnated for over 12 years.’[16]Apparently, lack of
fresh blood had not stopped the Japanese economy being highly successful until
1990. Mr Johnson fails to consider whether it might have been Japan’s economic
policies that caused this problem of stagnation in 1990, rather than the need
for fresh blood that apparently mysteriously surfaced just then.

Much of the argument suggesting benefits of immigration into the USA is, on
closer examination, based on the total growth of the US economy, rather
than on growth per head of population:

Thus, the size of the economy, measured, say, by real gross domestic product
(GDP) grew more rapidly than it would have without immigration. This is, we
think, what historian Maldwyn Allen Jones had in mind when he wrote in his
classic book, American Immigration:

‘The realization of America’s vast economic potential has…been due in
significant measure to the efforts of immigrants. They supplied much of the
labor and technical skill to tap the under-developed resources of a virgin
continent...’

But this concept of growth, sometimes called ‘extensive growth’, is not what
economists usually mean by the phrase ‘economic growth’. Instead the growth of
labor productivity, or the growth of per capita output, or the growth in the
standard of living – ‘intensive growth’ – is usually of greater interest… If per
capita output is to grow, GDP must grow faster than the population. So the
question becomes: Does immigration increase or reduce labor productivity?[17]

There is, in fact, some dispute as to whether, for example, the massive
immigration into the US at the end of the nineteenth century did increase the
per capita GDP of native Americans. Much of the supporting argument is based on
the boost given to the increase in the ratio of the working population to the
total population, because most immigrants were young workers; but this is
obviously a one-off effect. For this argument to have permanent validity, there
would have to be a never-ending immigration of new, young workers.

The second argument put forward is one of increased returns to scale, with
large pools of capital and labour reducing costs. This argument seems a
reasonable one, but is unproven. There is, of course, the opposite argument of
the costs of congestion.

Neglect of wealth effects

To understand why those who advocate free movement of labour are wrong to
view free movement of labour as analogous to free trade, it is essential to
place discussion of the economics of migration on a proper and full basis, and
to include a discussion of the effects on wealth.

It is also useful to clarify the position using some numbers – generally thin
on the ground in pro-immigration arguments.

As Professor Borjas states:

Instead, many observers simply discuss the potential sources of the economic
benefits, do a lot of hand waving, and often insinuate that these benefits must
be very large. On the rare occasions when actual numbers are provided, there is
seldom any documentation to substantiate the often-exaggerated claims.[18]

At all times, this study considers a totally free market with no welfare
state. It does not consider the fiscal effects of immigration, such as taxation
and welfare. It assumes constant returns to scale, and it does not consider the
externalities of immigration. It assumes that all existing investment is exactly
correct for the native population. It assumes each worker has only one
dependant.

The core argument is that any addition to the population, whether through
increased fertility or immigration without capital, must require capital and
wealth to be provided for the newcomers. Either this is supplied by the
newcomers alone (in which case, assuming wages similar to those of natives, they
can never catch up with natives, who have already accumulated wealth) or it is
appropriated from natives, by a process the NRC calls ‘assimilation’, and
apportioned to newcomers, in which case the natives suffer a loss of wealth. In
one case, newcomers never catch up with natives and so cannot add to natives’
wealth; in the other, the natives suffer an outright loss of wealth.

The only exception to this, as already mentioned, would be if newcomers were
so skilled or so wealthy that they could provide for themselves the wealth the
natives have accumulated over generations and centuries. Such newcomers to the
USA and Britain do exist, but they are few in number. Only five out of 582,000
new arrivals in Britain in 2004 came under permits issued to persons ‘of
independent means’. As for the USA, in The New Americans the
NRC quotes data from the US Immigration and Naturalization Service, showing that
in 1995 10,465 visas were available for allocation to investors and their
families, but only 540 were taken up – within an immigration total of 720,461.
In effect, therefore, immigration should only be offered to those who bring with
them capital of at least £282,000 for a family of four (according to the
calculations below) and who have skills that are better than the average among
natives, or who can accumulate the £282,000 of savings in a short time.

In any case, the argument in favour of the free movement of labour is not one
of selecting a few, carefully picked, super-skilled or extremely wealthy
immigrants: it is an argument for open doors.

There are three points to consider in distinguishing free migration from free
trade.

First, as the NRC points out, there is a difference in concept. Immigration,
in terms of permanent settlement immigration, is a transfer of stock, while
trade is a flow: ‘an immigrant who comes permanently to the United States
competes with natives for every year of his or her working life. Trade is a
flow, dependent on exchange rates and trade policies…’[19]

Furthermore, an influx of goods has no effect on the accumulated wealth of an
economy, such as homes, water supply, schools, roads, etc. An influx of people
has an enormous effect.

Second, while some economists quite correctly point out that total world
output would increase if factors flowed freely, every government is, by its
mandate, focused on maximizing economic gains for the native population. While
it can be demonstrated that free trade would benefit a country (albeit with
winners and losers within that country), free immigration would mean that nearly
the entire distribution of the gains from free immigration would go either to
the immigrants or to the inhabitants of the countries from which the immigrants
came (apart from the small immigration surplus in production, which ignores the
deleterious effects on the wealth of the natives).

After all, various calculations as to the effect on the USA of the arrival of
10 per cent of its workforce from abroad show the immigration surplus – that is,
the value to native Americans – to have been in the range of $1–10 billion in
1996. Of course, the benefits to migrants are large, since they earn much
greater incomes in the USA than they did in their home countries. The benefits
to the native population are conversely tiny and are accompanied by serious
distribution problems (as well, of course, as fiscal costs and national identity
concerns). As Professor Borjas states, ‘the net gain seems much too small to
justify such a grand social experiment’.[20]

Third, and most important, is the effect of immigration on wealth, as well as
on production.

Balance-sheet effects are usually neglected in economic theory, and much
modern economic analysis concentrates on micro-economic income effects. However,
when considering the standard of living of natives, we must take account of the
accumulated wealth of a country, and this is not reflected in GDP figures.

Not for nothing did Adam Smith entitle his famous work, An Inquiry into
the Nature and Causes of the Wealth of Nations and Karl Marx call his work,
Capital.

Income and wealth are, of course, closely interconnected, with more income
increasing wealth, and wealth in turn helping to increase income.

Most economic discussion on migration has concentrated on the impact of
migration on income or GDP; but this is only part of the picture.

To take a simple point, all that is reflected in GDP figures for housing is
the annual addition, which in Britain is around 135,000 houses (net) per annum,
plus the cost of repairs, etc. The existence of 20 million houses plays no part
in GDP calculations, but does play an immense part in wealth and ‘standard of
living’. All other ‘created assets’, such as roads, schools, factories, etc.,
play the same role.

To consider the standard of living of a country’s inhabitants, we must not
only take account of the income and expenditure account, or GDP, but also the
wealth or balance sheet. Standard of living does not depend solely on GDP: it
also depends on the use of the accumulated wealth, such as houses, buildings,
roads, factories, water supplies, power stations and a myriad other items. These
are not reflected in GDP, except in the form of marginal annual additions.

The NRC analysis refers to this aspect in just one brief footnote to the
passage quoted below:

Similarly, if the children of immigrants born in the United States distribute
themselves among the skilled and unskilled labor force and also save and invest
in the same way as natives, the effects of an increase in immigration over one
generation will be negligible one generation following that.[21]

The footnote reads:

This abstracts from secondary effects, such as the physical capital required
to transform immigrant children into skilled workers, which immigrants did not
bring with them.[22]

In reality, the capital required is not simply that required to make skilled
workers, but is also the social capital or wealth required to bring immigrants
up to the standard of living of natives.

“The Social Affairs Unit is famous for driving its coach and horses through the liberal consensus scattering intellectual picket lines as it goes [and] for raising questions which strike most people most of the time as too dangerous or too difficult to think about.” (The Times)